Global Advanced Research Journal of Management and Business Studies (ISSN: 2315-5086) April 2018 Vol. 7(2), pp 064-058

Copyright © 2018 Global Advanced Research Journals   

Original Research Articles

Impact of Credit Risk Modeling on the efficiency of Banks-A case of conventional Banks of Pakistan

Asma Asif and Fahad Bashir

Mphil Scholar, Lahore School of Accountancy UOL Lahore Postcode 54000,PakistanMphil Scholar, Lecturer NCBA&E West Canal Campus Lahore Postcode 54000,Pakistan

Correspondence Author Email: FahadBashir211@gmail.com + 923338578128

Accept 16 April 018

Abstract 

The purpose of the study was to examine the usage of credit risk models in the conventional banks of Pakistan and to identify the effect of credit risk modelling on the efficiency of banks. Credit risk models are used to measure and manage the credit risk taking into account the correlations in credit quality between different borrowers by considering the fact that they may operate in the same industries and / or countries and be influenced by the same economic forces. The variables that were identified for examining the effect of credit risk modelling on the efficiency of banks were PD Model, LGD Model and EAD Model. ROA and ROE were taken as the measure of bank’s efficiency. Thirteen banks were selected in a sample to undertake this research study. Data were ranging from year 2012 to 2016. Dataset were consisting of 65 observations. Data were collected from the published annual financial reports of the commercial banks. Different kinds of statistical tests were applied depending upon the nature of data and objectives of the study. Frequency analysis is applied to examine the usage of credit risk models. On the basis of Hausman testing, the random effects model was used to evaluate the dependencies of variables. Pearson correlation analysis is applied to examine the strength of relationship. It was concluded from the study that the banking industry of Pakistan was not enough developed in terms of adopting the credit risk models. Another key finding of the result is that the credit risk models have a positive effect on the efficiency of banks.

Keywords: Credit, Credit Risk, Bank.